Real Estate Leaders from Across the Globe Discuss Key Issues Facing the Industry

By Erin Corcoran

The REIT approach to real estate investment is gaining acceptance around the world. Right now, there are more than 20 countries with REIT or REIT-like legislation and that number is growing. "Around the world, REITs are expanding," says Gilbert Menna, a partner at Goodwin Procter LLP. "Without question, the REIT is becoming the standard for securitized real estate." He says that international REIT legislation will bring more opportunities for investors around the world. Concurrently, many U.S. REITs are beginnning to invest outside the United States. At the 2006 NAREIT Annual Convention held in San Francisco in November, REIT executives from the United States as well as across the globe sat down and discussed these emerging trends.

U.S. Executives Look Abroad

		Global Real Estate Associations Working Together At NAREIT's Annual Convention, industry heads from real estate associations around the world met to discuss issues of common interest.

The U.S. REIT industry is the largest, oldest and most advanced in the world. But in terms of the entire investible real estate market, there are a wealth of opportunities beyond the United States. According to UBS Securities LLC, only 8 percent of the world's investment-grade commercial real estate is owned by listed companies in the world today, which means there is $14 trillion of real estate which translates into investment opportunities for pension funds, mutual funds, private equity investors and REITs.

Many U.S. companies are going abroad to expand their portfolios and create value for their shareholders. For example, like many REITs, Host Hotels & Resorts (NYSE: HST) is looking to apply its established U.S. infrastructure to other parts of the world. "Our shareholders want to see our portfolio expand globally," says Christopher Nassetta, president and CEO of Host Hotels. "They recognize that we need to be opportunistic right now."

With many international opportunities available, companies want to learn about the local culture before spending a significant amount on global investments. "From our standpoint, international opportunities should not detract from what you're doing in the United States," says R. Scot Sellers, chairman and CEO of Archstone-Smith (NYSE: ASN). "Our goal is to add shareholder value, and if investing abroad works, we'll do it."

Hamid Moghadam, chairman and CEO of AMB Property Corporation (NYSE: AMB), says that being an earnings-valued operating business is an advantage. "It gives your company a valuation, which is an advantage in terms of going overseas," he says.

Yet, there are a few roadblocks when going global. Some problems include establishing a reputation in a new country as well as developing a working relationship with locals. "A well-run U.S. company with a great reputation here doesn't automatically translate around the world," Sellers says.

FTSE EPRA/NAREIT Global Real Estate Index: North America
Countries	Number of Companies	Market Cap (millions of dollars)	Percent of Index Series	Percent of Global
U.S.	117	382,755.1	93.3	43.9
Canada	21	27,532.5	6.7	3.2

Another problem companies are encountering is that most international property companies are valued on an NAV basis, instead of the FFO earnings basis common in the United States. This is a barrier because yields are tight on an acquisition basis. "U.S. REITs need to create value overseas," says David Simon, CEO of Simon Property Group (NYSE: SPG). "It's going to take a long time. M&A opportunities are available on a long-term NAV basis and not on a current earnings accretion and dilution basis."

There are ways to overcome these barriers. U.S. REITs are able to establish good working relationships and learn about business in foreign countries by forming joint ventures with local companies. "A third-party investor assists in financing your assets overseas," says Jackson Hsieh, managing director of UBS Securities.

Also, partnering with appropriate companies in Europe and Asia can bring value, improve site selections and ease the approval process. It also allows companies to put their capital in order to get returns that they want. "We like to partner with someone who brings something to table other than just capital," Simon says.

Ultimately, Sellers says that having an international presence will take time. "Many U.S. companies in other industries are very successful on global platforms. In time, the REIT industry also can be successful in a global real estate platform."

Photo by Carla Osberg

(left to right) Jackson Hsieh, managing director of UBS Securities, LLC; Hamid Moghadam, chairman and CEO of AMB Property Corporation; Christopher Nassetta, president and CEO of Host Hotels & Resorts; R. Scot Sellers, chairman and CEO of Archstone-Smith; and David Simon, CEO of Simon Property Group discuss how the U.S. REIT industry broadens its horizons.

Asian REITs Show Strong Growth

The Asian REIT market has grown considerably in recent years. According to the Asian Public Real Estate Association (APREA), the Asian REIT market cap over the last six years has increased 34 percent, thanks to more than 80 REIT IPOs.

"UBS Securities predicts that the current market capitalization will double by 2010," says Peter Mitchell, CEO of APREA. "Growth is assured because of various global and regional factors." Those factors include recent REIT legislations in several countries such as Singapore and Hong Kong that will make it easier for those REITs to invest in the rest of the region, and for investors outside the region to invest in Asian REITs.

Steve Carroll, managing director at CB Richard Ellis Global Real Estate Securities, says that growth of the Asian market is due to investor confidence. "There is an incredible amount of institutional investor capital flowing into Asia due to the advent of recent REIT legislation," he says. "Also, the myriad global REIT funds has provided many opportunities as well."

Out of the Asian REIT market, Japan contains 64 percent of the market capitalization. "Japan's general economy will continue to grow and support further expansion of REIT investment," says Yuichi Hiromoto, president and CEO of the Mitsubishi Corporation UBS Realty Group, Japan's largest general trading company, and co-chairman of Japan's Association for Real Estate Securitization (ARES).

Expectations for the J-REIT market are flying high for 2007. Several J-REITs are hopeful that cross-border REIT activity will increase in the next year with joint ventures with non-Japanese asset management companies listed on foreign markets such as Australia, Hong Kong or Singapore.

FTSE EPRA/NAREIT Global Real Estate Index: Asia
Countries	Number of Companies	Market Cap (millions of dollars)	Percent of Index Series	Percent of Global
Australia	26	91,138.8	32.95	10.45
Japan	25	98,695.4	35.68	11.32
Hong Kong	24	67,804.7	24.51	7.77
Singapore	12	18,034.8	6.52	2.07
New Zealand	2	949.3	0.34	0.11

Another expectation is that the Japanese REIT industry will gain more credibility with investors in the aftermath of the resolution of a series of regulatory issues, including the assessment of penalties by Japan's Financial Supervisory Agency. These regulatory developments include a newly established "Financial Product Transaction Law," which is Japan's version of Sarbanes-Oxley compliance.

"This law will enable more players to enter into the REIT sector," Hiromoto says. "Not only will it enable a more active REIT market, the general economy will continue to grow and support further expansion of REITs as investments."

Turning to another country in the general Asian market, Australia is looking for more opportunities offshore. The Australian REIT market cap is more than $90 billion U.S. with real estate securities representing 70 percent of real estate investment marketplace. This is a big contrast from the rest of Asia, which is just in the beginning of the securitized real estate marketplace and only 5 percent securitized. "Australia is a mature market," Mitchell says. "Its fund managers are looking for two things: offshore investments as well as offshore platforms." More than 40 Australian REITs are now located offshore, and a number of them are setting up platforms in Asia and around the world.

Looking ahead, new legislation within the Asian REIT market is expected in the near future. "We are waiting on China and the Philippines to set up policy and establish new REIT markets," Mitchell says. "The demand for REITs in Asia is extraordinary."

Photo by Carla Osberg

(left to right) Steve Carroll, managing director of CB Richard Ellis Global Real Estate Securities; Antony Green, head of property investment banking group, Macquarie Bank Limited; Yuichi Hiromoto, president and CEO of Mitsubishi Corporation, UBS Realty Inc.; and Nic Lyons, CEO of the GPT Group speak about the REIT activity in Asia at the Global Summit.

Big Changes Coming for Europe

There is a wave of excitement about REITs in Europe, with new REIT legislation taking effect in the United Kingdom on Jan. 1, 2007 and in Germany in early 2007. These two countries join Belgium, Bulgaria, France, the Netherlands and Turkey, who had already established REIT or REIT-like structures in Europe. Other countries, such as Finland, Italy, Luxembourg and Spain, are reportedly contemplating REIT-like legislation as well.

The market capitalization on the FTSE EPRA/NAREIT Global Real Estate Index shows approximately 50 percent of the market cap is in North America, 30 percent in Asia and 20 percent in Europe. "One of the overriding reasons why Europe has been lagging behind is because it did not have the REIT structure in place in several European countries and jurisdictions," says Nick van Ommen, CEO of European Public Real Estate Association (EPRA). "That is going to change with the U.K. and Germany converting in 2007."

Enthusiasm abounds in the U.K. for legislation that allows listed property companies the option of converting to REITs. "We are really encouraged by how quickly the legislation was passed," says Patrick Sumner, head of property equities with Henderson Global Investors. "The framework is quite favorable."

Britain has certain characteristics that make it unique on a global basis. For example, it is a small country with a lot of interest in market supply terms because of land shortage. "It's a concentrated market," says Tim Wheeler, chief executive of Brixton, PLC.

FTSE EPRA/NAREIT Global Real Estate Index: Europe
Countries	Number of Companies	Market Cap (millions of dollars)	Percent of Index Series	Percent of Global
U.K.	41	91,220.3	49.24	10.46
France	10	24,906.6	13.4	2.9
Netherlands	8	21,716.0	11.7	2.5
Austria	5	12,919.7	6.97	1.5
Sweden	6	8,489.7	4.6	0.97
Germany	5	7,931.1	4.3	0.91
Switzerland	4	4,458.2	2.4	0.5
Belgium	5	3,407.9	1.8	0.4
Italy	4	3,875.5	2.1	0.4
Finland	3	1,868.0	1.0	0.2
Denmark	3	916.8	0.5	0.1
Poland	1	1,538.9	0.8	0.2
Greece	2	883.5	0.5	0.1
Norway	2	1,115.9	0.6	0.1

However, there have been some roadblocks in the United Kingdom. One of them is the fact that only listed properties are allowed to convert to REIT status. "This means that only listed companies in the U.K. can convert on the first day of the legislation," Wheeler says. Many companies in the U.K. see this as an obstacle in the new legislation. "It poses a problem with the fact that it will not create new REITs," says Martin Barber, chief executive of Capital & Regional, PLC, which does not plan on converting to REIT status in 2007.

Another barrier is the shareholder 10 percent rule. Originally, the rule would allow no more than 10 percent ownership by a single stockholder. This drew a lot of concern from most companies with long-standing, larger stockholders. "We have shareholders that possess 20 percent of the company, and they have been investing for about 50 years, which was going to make the process more difficult," Wheeler says.

However, the newest legislation allows shareholders to own more than 10 percent, as long as the income from the dividend is paid out in a different format. This role applies only to corporate shareholders, so individuals owning more than 10 percent can receive dividends.

(left to right) Jane Delfendahl, investment officer of the California Public Employees’ Retirement System; Lutz Ristow, CEO of TAG Tegernsee; Patrick Sumner, head of property equities, Henderson Global Investors; and Tim Wheeler, chief executive of Brixton PLC speak about the changes taking place in Europe with the onset of new REIT legislation in Germany and the U.K.

As for Germany, REIT legislation is swiftly coming together. The first draft of German REIT legislation was issued on Nov. 2, 2006, which began the legislative process and public discussion. "Depending on the final version of the law, many companies will convert, provided the residential business is included, which, surprisingly, was excluded in the November draft," says Lutz

Ristow, CEO of TAG Tegernsee, a publicly listed property company in Germany. However, he says that if residential properties are not in the final law, they will soon be included in the later legislation. "It is easy for me and my colleges to establish a German residential REIT in London or Paris, thereby circumventing the restrictive German law," Ristow says.

As 2007 progresses, these two countries will begin their REIT journey and investors and REIT executives will be eager to see how the rest of the story unfolds. "Legislation needs to happen first, and then iron out all the kinks later," Barber says.